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First Simple Bank pays 6 percent simple interest on its investment accounts. First Complex Bank pays interest on its accounts compounded annually.

Required:
What rate should the bank set if it wants to match First Simple Bank over an investment horizon of 10 years?

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1 answer
  1. Assume an investment of $1.00

    First Simple Bank:
    amount after 6 years = 1 + PRT
    = 1 + 1(.06)(10)
    = 1.60

    Complex Bank:
    1(1+i)^10 = 1.6
    take 10th root of both sides

    ( (1+i)^10)((1/10) = 1.6^(1/10)
    1+i = 1.048122..
    i = .048122..
    or
    appr 4.81%

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